ECONOMY

Strauss-Kahn Resigns as Arrest Rattles the Globe

The former IMF Chief’s disgrace could have economic reverberations worldwide

IMF chief Dominique Strauss-Kahn (right) appears for his arraignment in federal court on Monday in New York City. Strauss-Kahn is being held on charges of sexually attacking a maid at a Manhattan hotel.(Emmanuel Dunand-Pool/Getty Images)

Most Americans barely knew his name a week ago, and even in Washington, Dominique Strauss-Kahn, who resigned as managing director of the International Monetary Fund on Wednesday night, was a low-profile figure in social circles. But in the days since the man known around the world as “DSK” was arrested on sexual assault charges in Manhattan, the global ramifications of his disgrace keep growing, along with his infamy.

Guilty or innocent, the former IMF chief almost certainly won’t be returning to the international scene any time soon, and in his absence even subtle shifts in policy could end up having big consequences, possibly including a new economic downturn in Europe with impact across the world. The IMF itself, a major international institution, could end up changed forever.

Ironically, the arena least likely to be changed by Strauss-Kahn’s downfall may well be the one that is most being talked about: next year’s French presidential election. Although Strauss-Kahn had been polling well against incumbent President Nicolas Sarkozy as an undeclared candidate, there was talk in France that DSK might not have survived the rigors of an election campaign even if he hadn’t run into trouble in New York.

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Apart from the African maid at the Sofitel hotel in New York, Strauss-Kahn to date has been publicly accused of sexual assault by only one other woman, Tristane Banon, a French journalist. But stories of DSK’s alleged aggressive behavior toward women have long been circulating in France. Even before his arrest, some of his wealthy backers in the financial community had suggested that his reputation was darker than that of previous womanizing French politicians, such as Francois Mitterrand or Valery Giscard d’Estaing. “This wasn’t the problem of a charismatic, powerful man attracting women. It was uglier,” according to one international financier who has been privy to those discussions.

The most immediate impact of DSK's absence from the scene could well be on the critical discussions he was mediating on the latest threat to the euro zone from the faltering economies of Greece, Portugal, and Ireland. Central to that deal was an agreement on debt relief between Germany and France, and DSK was known to have a good relationship with Chancellor Angela Merkel. With French Finance Minister Christine Lagarde—a leading candidate to replace Strauss-Kahn—stepping in to lead the discussions, the change in the IMF’s or France’s position won’t be dramatic. It was at Merkel’s insistence that the IMF became involved at all, eventually turning into a key player in the $350 billion bailout of Greece, Ireland, and Portugal a year ago.

Now those economies need a new wave of debt relief, and the question of how much and under what conditions—the politics of which DSK was a master—is being decided daily. One critical question is whether the debt should be “restructured,” or reduced, and if so on what terms, or should the euro zone countries simply provide another bailout. The day after his arrest, DSK had been expected at a meeting of euro zone finance ministers in Brussels. In private discussions, DSK had been pushing the stronger European banks to share the burden of a restructuring, according to the international financier, who would discuss the internal deliberations only on condition of anonymity.

If those weaker economies founder, and some of their banks fail, Europe could be roiled by another crisis, which in turn will affect the world economy. Just as the headwinds of the euro crisis a year ago held back recovery in the United States and elsewhere, a second crisis could hurt the U.S. economy at a time when unemployment is still hovering at what, for President Obama, is a politically hazardous 9 percent going into an election year.

To be sure, it may well be that the Europeans agree to pretty much the same terms that DSK would have pushed. There isn’t a wide range of choices: German and French banks are deep into all three foundering economies, and Merkel and the other EU leaders know that contagion from a Greek collapse will have terrible consequences for their own national banks as well as possibly the euro currency itself.